Shareholder loans and personal expenses in a small corporation: rules and costly traps

When an owner takes money out of a Canadian corporation that is not salary, a bonus or a declared dividend, it is usually recorded in a shareholder loan account. Under subsection 15(2) of the Income Tax Act, a loan to a shareholder can be included in the shareholder's income; subsection 15(2.6) says that rule does not apply to a loan repaid within one year after the end of the corporation's tax year in which it was made, as long as the repayment is not part of a series of loans and repayments. Personal expenses paid by the corporation can also be taxed as a shareholder benefit. These rules are a frequent source of both tax surprises and extra accounting fees, and they are easy to manage with a monthly habit.

This guide is part of the corporate accounting mistakes guide. This is general information; the rules have exceptions, so confirm your situation with your accountant.

How a shareholder loan account works

The shareholder loan account records amounts between you and the corporation:

A credit balance, where the corporation owes you, is generally not a tax problem; you can usually withdraw it without tax. A debit balance, where you owe the corporation, is where the rules bite.

The one-year repayment rule

Subsection 15(2) can include a loan or indebtedness in the shareholder's income. Subsection 15(2.6) excludes a loan repaid within one year after the end of the lender's taxation year in which the loan was made, where it is established that the repayment was not part of a series of loans and repayments.

Illustrative timeline

A corporation has a 31 December year end. The owner takes $20,000 out in March 2026 that is not salary or dividend.

• The loan arose in the corporation's 2026 tax year, which ends 31 December 2026.
• To rely on subsection 15(2.6), it must be repaid by 31 December 2027, and not by a new loan.
• If it is not repaid by then, the $20,000 can be included in the owner's 2026 income.
• A later repayment may allow a deduction in the year repaid under a separate provision, but the timing mismatch can be costly.

Repaying by declaring a salary or bonus or dividend is common, but those payments are taxable to the owner in their own right, need proper documentation and slips, and need to be planned before the deadline.

Exceptions

There are exceptions for some employee loans, such as loans to acquire a home, shares of the corporation or a vehicle for work, where the loan is received because of employment rather than shareholding and bona fide repayment arrangements are made. These are narrow and fact-specific; ask your accountant before relying on them.

Imputed interest

Even where subsection 15(2) does not apply, a low-interest or interest-free shareholder loan may give rise to a deemed interest benefit under section 80.4, calculated using the CRA's prescribed rate, less any interest actually paid within the required time. Check the current prescribed rate on the CRA site.

Personal expenses paid by the corporation

If the corporation pays a personal expense, for example a family vacation, personal groceries or the personal portion of a vehicle, two things can happen:

1. The corporation's deduction may be denied, because the expense was not incurred to earn business income.
2. The value may be taxed to the shareholder as a benefit under subsection 15(1), without the corporation getting a deduction, which is worse than paying a salary.

Input tax credits claimed on personal purchases can also be denied on review.

Illustrative cost

Suppose $6,000 of personal expenses are discovered in a CRA review. The corporation loses the $6,000 deduction; the owner is reassessed for a $6,000 benefit; the corporation repays any GST/HST credits claimed on the purchases; interest applies to all of it; and the accountant bills, say, 5 hours at $130 = $650 to respond. Paying the same $6,000 as salary in the first place would have been deductible to the corporation and taxed once.

Vehicles: a special case

Vehicles owned or leased by the corporation and used personally by the owner can create a standby charge and operating cost benefit, while vehicles owned by the shareholder can be reimbursed through a reasonable per-kilometre allowance. A logbook is the key record either way. The rules are detailed; ask your accountant which approach suits you before buying.

How to keep the account clean

• Use a separate business bank account and card and do not pay personal bills from them.
• Record every owner withdrawal as salary, dividend or loan at the time, not at year end.
• Reimburse business expenses you pay personally with an expense claim and receipts.
• Review the shareholder loan balance monthly and before year end.
• Plan repayment of any debit balance with your accountant well before the one-year deadline.
• Keep minutes for dividends and bonuses, and file the T4 or T5 slips. See the year-end package checklist.

Why this raises your accounting fee

Rebuilding a shareholder loan account from a year of bank statements is slow work, and the decisions it requires (salary, dividend, loan or benefit) need the accountant's judgment. It is one of the most common out-of-scope charges in an engagement letter.

Shareholder loan questions are a common subject of CRA reviews, and personal purchases on business cards are also a frequent source of automation errors and denied ITCs.

Frequently asked questions

Can I just declare a dividend at year end to clear the loan?

Often that is what happens, but it must be properly declared, recorded in the minute book and reported on a T5 (and RL-3 in Quebec), and it is taxable to you. Plan it with your accountant.

Does the rule apply to family members?

Subsection 15(2) applies to loans to shareholders and to persons connected with them, which can include family members. Ask before lending corporate money to relatives.

Is a credit balance taxable when I withdraw it?

Withdrawing money the corporation genuinely owes you is generally a loan repayment, not income. Keep records showing how the balance arose.

Sources

• Justice Laws Website — Income Tax Act sections 15 and 80.4
• Canada Revenue Agency — shareholder benefits and loans, automobile benefits and prescribed interest rates
• Revenu Québec — Quebec treatment of shareholder benefits